Hungary-IMF Pact Doubted in Analyst Poll

Hungary’s outlook for obtaining International Monetary Fund aid before the 2014 elections
remains clouded a year after talks started, with a plurality of economists in a poll predicting there would be no agreement. Photographer: Akos Stiller/Bloomberg

Nov. 19 (Bloomberg) -- Hungary’s outlook for obtaining
International Monetary Fund aid before the 2014 elections
remains clouded a year after talks started, with a plurality of
economists in a poll predicting there would be no agreement.

Ten of 22 analysts from London to Budapest said Hungary’s
negotiations with the IMF and the European Union won’t yield an
accord in the next 1 1/2 years, compared with eight who expect a
deal and four who give it a 50 percent chance, according a
Bloomberg survey. None predicted an aid package in 2012.

Prime Minister Viktor Orban sought aid on Nov. 17, 2011 as
the forint plunged to a record low against the euro, the
country’s credit rating was cut to junk and the government
struggled to sell debt at auctions. Talks for a loan of about 15
billion euros ($19 billion) have been delayed because of Orban’s
resistance to meet legal and economic terms set by the lenders.

“There will be no IMF agreement before elections unless
there is a significant deterioration in market sentiment,” Nora
Szentivanyi, a JPMorgan Chase & Co. economist in London, said by
e-mail.

The forint has gained 10.9 percent against the euro this
year, the world’s best performance. Hungary has benefited from
stimulus by the U.S. Federal Reserve and the European Central
Bank; investors’ hunt for higher-yielding assets amid record-low
rates in the developed world; and speculation that the
government is nearing a loan accord with the IMF and the EU.

The currency advanced 0.2 percent to 284.13 per euro by
9:31 a.m. in Budapest.

‘Really 50-50’

The cost to insure Hungarian government debt against non-payment with five-year credit-default swaps fell to 317 basis
points from as high as 735 points Jan. 5, data compiled by
Bloomberg show. The yield on the benchmark 10-year forint-denominated government bond dropped to 6.91 percent from 10.8
percent on Jan. 4.

The performance of Hungarian assets may convince the
government that it doesn’t need IMF assistance, said David
Nemeth, an economist at ING Groep NV in Budapest.

“It’s really 50-50 and it depends on the market but if
things will go as well next year as this year then my guess is
there won’t be an agreement,” Nemeth said in an e-mail.

Orban shunned the IMF after winning a two-thirds
parliamentary majority in 2010 to conduct economic policy
without having to adhere to lending conditions.

‘Unorthodox’ Measures

The government implemented what it called “unorthodox”
measures to keep the budget under control without backtracking
on election pledges to end five years of austerity and to
introduce a flat-rate personal income tax. It effectively
nationalized private-pension savings and levied industry taxes
on financial, energy, telecommunications and retail companies.

The measures damaged investor confidence, while Europe’s
largest bank levy contributed to curtailing credit as the
foreign lenders that control most of the country’s financial
industry cut support to their units to repair balance sheets and
comply with tighter rules.

Hungary last year lost its investment grade at Fitch
Ratings, Standard & Poor’s and Moody’s Investors Service, while
the forint plunged 15 percent against the euro in the second
half of last year, the most in the world.

The economy is in its second recession in four years. The
contraction continued in the third quarter this year, with gross
domestic product shrinking 1.5 percent from June to September
compared with a year earlier. That is making it more difficult
for the government to keep the budget deficit within the EU’s 3
percent limit.

‘Balanced, Sustainable’

The government backtracked on a pledge to cut a bank tax in
half, raised a financial transaction levy, announced charges on
utilities, and renounced a plan to raise teachers’ wages.

The policies widen the distance between Hungary and the
IMF. The Washington-based lender is looking for a “balanced and
sustainable package of measures” from Hungary, Gerry Rice, an
IMF spokesman, said on Oct. 4.

The Cabinet decided to make the special bank levy permanent
and raised the tax load of energy companies as it seeks to
ensure the 2013 shortfall will be 2.7 percent of GDP, the
Economy Ministry said on Nov. 16. That was the third set of
measures announced by the government to shore up next year’s
budget.

Billboard Campaign

IMF and EU officials held a week of “constructive” talks
in Budapest in July, following a seven-month standoff over a
central bank law the lenders said would have undermined the
Magyar Nemzeti Bank’s independence.

Optimism about a deal faded as Hungary launched an anti-IMF
billboard campaign last month. The Washington-based lender has
no date set to continue talks, Rice said Nov. 1.

Elections in 2014 may be the biggest obstacle to a deal as
support for Orban’s ruling party has slipped since 2010,
according to Attila Tibor Nagy, an analyst at the Meltanyossag
political research institute in Budapest.

“As elections approach the government can’t pass austerity
measures” or give up on the flat tax “whose biggest
beneficiaries are Fidesz voters,” Nagy said in phone interview
Nov. 15.

Orban’s Fidesz leads all parties with 22 percent backing,
according to a Median poll published on HVG weekly’s website on
Nov. 7. Egyutt 2014, a newly formed opposition umbrella group,
had 14 percent, followed by 10 percent both for the Socialist
Party, and the radical nationalist Jobbik, Median said. No
margin of error was given.

The government insists that it is nearing an aid deal.
Orban on Nov. 16 said the government wants to reach an agreement
and is close to a pact.

A deal may be reached if market conditions deteriorate,
according to several economists in the Bloomberg survey,
including Neil Shearing of Capital Economics Ltd. in London.

“If the euro crisis escalates once again - and our house
view is that it will - then Hungary could come under serious
pressure,” Shearing said in an e-mail. “This in turn could
prove the trigger for a deal with the IMF.”